Stocks Markets and the Boy Who Cried Wolf

Anyone who has undertaken serious analysis of stock markets should realize that stock markets are incredibly overvalued right now. Performance of stocks today is driven by two things: hope and monetary stimulus. Neither is a long-term driver of stock price growth, and both could easily fade very quickly.

Many investors, however, have been lulled into a false sense of security due to the results of all this stimulus. They fail to see the warning signs that stocks are due for a correction, so they assume that the next correction may be like all the others, a temporary dip that will be overcome by more government action. But the next correction may be too severe for the government to be able to paper it over, and it could be the precursor to the stock market crash that so many have been expecting.

A Look at Recent Stock Market Corrections

Anyone looking at stock market performance in recent years and trying to compare it to previous stock market performance has got to be quite perplexed. We’ve seen stocks hit all-time highs, drop precipitously, then hit new highs on a number of occasions. It’s highly confusing behavior, with some investors pulling their money out of markets since they fear a crash, while most investors leave their money in markets and hope for the best.

Stock markets saw a meteoric rise after President Trump was elected, with the Dow Jones Industrial Average reaching a high close to 27,000 points in January 2018. But the Dow quickly corrected, losing well over 10% by March 2018. From there, the Dow recovered, setting new highs in September 2018. But December saw renewed weakness, with the Dow losing nearly 20% to end the year at a loss.

2019 saw renewed growth, with the Dow continuing to shrug off headwinds, and growth continuing through into 2020, as the Dow hit an all-time high of 29,551.42 points in February 2020. But as coronavirus and its effects began to impact the economy, stocks fell precipitously. By March 23 the Dow lost over 37%, falling to 18,591.93 points. It was the worst performance of stock markets since they lost nearly 55% in the 2007-2009 crash, and wiped away trillions of dollars in investor wealth.

And yet, since then, stock markets have recovered once again, thanks in no small part to the $3 trillion of fiscal stimulus that was funded by $3 trillion of Federal Reserve monetary stimulus. But no matter how much stimulus the federal government creates, it can’t push markets back into further growth. At the end of the day, real sustainable growth in stock markets is going to have to come from real growth in the economy, which isn’t looking too good right now.

The Danger to Investors

The danger to investors is that markets have been crying wolf for so long that when the actual crash occurs, they may be tempted to disregard the signals. During the previous stock market crashes, the collapse of the dotcom bubble and the collapse of the housing bubble, stock markets peaked and then began a slow decline. We didn’t see multiple tops or huge crashes followed by quick recoveries. Stock market behavior over the past few years has been very unusual, and investors basing their investments by comparing current stock market behavior to previous stock market crashes may get caught out when the final crash occurs.

Certainly this year’s crash convinced many an investor that the end was here. But the subsequent recovery may have many investors convinced that government stimulus can overcome any stock market crash. And more importantly, those investors may also believe that in the event of future stock market crashes the federal government will step in once again to prevent a crash.

That moral hazard is similar to the thinking that led to the creation and collapse of the housing bubble. Banks engaged in risky lending behavior, expecting to be bailed out when things got bad. And as it transpired, they did get bailed out. But the threat to the financial system from the collapse of the housing bubble gave everyone quite a scare.

Now investors find themselves in the position banks were in pre-2008. They’ve been conditioned to believe that the government will step in to bail them out when stock markets dip. They’re no longer paying attention to economic fundamentals, getting involved in day trading to make quick gains on hot stocks. They’re relentlessly buying the dip, believing that every dip will be followed by a rebound.

But what happens when the next dip doesn’t result in a rebound? What happens when the next dip is the first of many, the precursor to the crash? Will you recognize the crash when it starts, or have you too been conditioned to believe that the government will step in to save you and protect your investments? Are you willing to bet your retirement on the hope that the federal government will step in and keep your 401(k) from losing money in a stock market crash?

How You Can Protect Your Investments

Many investors have decided that they’ve had enough of the stock market roller coaster, and have decided to protect their investments with gold. For a while, it looked like gold investors had misplaced their trust in the yellow metal, as it just seemed never to want to take off. But as the economy crumbled under COVID lockdowns, gold began to skyrocket. From around $1,500 at the beginning of 2020, it rocketed to over $2,000, surpassing its all-time highs. Even today gold is hovering around $1,900 an ounce, rewarding those investors who had the foresight to protect their retirement assets with gold.

If you still have assets in an IRA, 401(k), TSP, 403(b), or similar retirement account, have you thought about investing those assets in gold instead? You don’t have to keep your retirement account assets in stock markets, where they’re susceptible to loss in the event of a major crash. You can roll over or transfer your existing retirement assets into a gold IRA, allowing you to invest in physical gold coins or bars while still enjoying the same tax advantages as any other IRA account. Best of all, those assets in most cases can be rolled over or transferred tax-free. That means no worrying about distributions, taxes, or penalties. Just move your money from stocks into gold and take advantage of gold’s ability to protect your wealth.

What are you waiting for? Do you want to see your retirement savings lose 20%, 30%, or 50% of their value before you decide to invest in gold? Or do you want to lock in your current gains and move your assets into gold before stock markets correct? The choice is yours – choose wisely.

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